The name Teddy Bear comes from former United States President Theodore Roosevelt, whose nickname was "Teddy". The name originated from an incident on a bear-hunting trip in Mississippi in November 1902, to which Roosevelt was invited by Mississippi Governor Andrew H. Longino. There were several other hunters competing, and most of them had already killed an animal. A suite of Roosevelt's attendants, led by Holt Collier, cornered, clubbed, and tied an American Black Bear to a willow tree after a long exhausting chase with hounds. They called Roosevelt to the site and suggested that he should shoot it. He refused to shoot the bear himself, deeming this unsportsmanlike, but instructed that the bear be killed to put it out of its misery, and it became the topic of a political cartoon by Clifford Berryman in The Washington Post on November 16, 1902. While the initial cartoon of an adult black bear lassoed by a white handler and a disgusted Roosevelt had symbolic overtones, later issues of that and other Berryman cartoons made the bear smaller and cuter.

Morris Michtom saw the drawing of Roosevelt and the bear cub and was inspired to create a new toy. He created a little stuffed bear cub and put it in his shop window with a sign that read "Teddy's bear," after sending a bear to Roosevelt and receiving permission to use his name. The toys were an immediate success and Michtom founded the Ideal Novelty and Toy Co.

At the same time, in Germany the Steiff firm, unaware of Michtom's bear, produced a stuffed bear from Richard Steiff's designs. They exhibited the toy at the Leipzig Toy Fair in March 1903 and exported 3000 to the United States.

By 1906 manufacturers other than Michtom and Steiff had joined in and the craze for "Roosevelt Bears" was such that ladies carried them everywhere, children were photographed with them, and Roosevelt used one as a mascot in his bid for re-election.

American educator Seymour Eaton wrote the children's book series The Roosevelt Bears, while composer John Bratton wrote "The Teddy Bear Two Step" which, with the addition of Jimmy Kennedy's lyrics, became the song "The Teddy Bears' Picnic"

Early teddy bears were made to look like real bears, with extended snouts and beady eyes. Today's teddy bears tend to have larger eyes and foreheads and smaller noses, baby like features that make them more attractive to buyers because they enhance the toy's cuteness. Also, now some bears come pre-dressed, sometimes for winter, spring, summer, or fall.